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Corporation tax

Companies resident in Ireland are liable to corporation tax on profits wherever arising.

Rates:

The standard rates of corporation tax may be summarised as follows:

Trading Income Non-Trading Income
2016 12.5% 25%

 

The 25% rate applies to trading income from dealing in and developing land other than fully developed land. A 20% rate applied to trading income from dealing in residential land up to 2008, from 2009 these profits are subject to tax at the individuals’ marginal rate or the 25% tax rate for Companies. In addition a windfall tax of up to 80% may apply to certain disposals of development land,

Trading losses and charges subject to the lower rate of tax may be offset against income other than that which is taxed at the lower rate on a “value and credit basis”.  Manufacturing losses and charges can be used in a similar fashion.

The effect of this is basically to give a credit against corporation tax payable for the value of the losses or charges.

No loss relief or group relief on a value basis applies where the Corporation tax refers to profits of the policy holders of a life assurance company.

Corporate Group Relief

Losses may be surrendered within a group or consortium subject to certain restrictions, which apply to losses in general. This applies to both Ireland and EU/EEA resident participants and to non EU residents in certain circumstances.

With effect from 1 January 2012 a Group may have a non EU/EEA parent if it is resident in a country with which Ireland has a double taxation agreement, or where the parent Company is regularly on a recognized stock exchange.

Close Companies

A surcharge of 20% is payable on the undistributed investment and rental income of a close company. Professional service companies are liable to a surcharge of 15% on 50% of its undistributed trading income and a surcharge of 20% on the undistributed rental and investment income.

There is a de minimus threshold of €2,000 below which the surcharge will not apply.

The close company surcharge does not apply in situations where a company is the recipient of a dividend from a foreign subsidiary, and the company would be exempt from capital gains tax on the disposal of the shares in that subsidiary provided it is located in an EU or tax treaty country.

Where a close company settles money to a trust on or after 1 January 2011, it will be treated as a distribution from the close company to the trustee of the trust, and will be subject to tax as a dividend in the hands of the trustee. In addition any sum received out of the settlement to the member of the close company or by the relative of such an individual will be chargeable to Income tax.

A close company that pays a dividend to another close company may jointly elect for the dividend “not” to be treated as a distribution. In effect this provides relief where a trading company pays a dividend to an investment/holding company as the income will not be treated as investment income in the holding company which will eliminate the close company surcharge.

Tip: Care needs to be exercised when making a payment from one investment company to another as this simply transfers the close company problem from one company to another.

Corporate donations

Companies may deduct, as a trading expense, donations made to charities and other approved bodies. The minimum amount of donation in any year is €250. The following are some of the bodies in which payments to will qualify for corporation tax relief:

  • A body approved for education in the arts;
  • A body approved as an eligible charity;
  • An institute of higher education, or a body established for the sole purpose of raising funds for such an institution;
  • Certain secondary level institutions;
  • The Equine Foundation;
  • An approved sports body for an approved project;

R & D Credit

Certain research and development expenditure qualifies for a tax credit of 25%; this is in addition to a tax deduction at 12 ½ %, giving an effective write off for R&D expenditure of  37½%. Claims must be made within 12 months of the end of the period in which the expenditure is incurred.

A repayment of excess R&D tax credits is available over a three year period. The repayment is limited to the higher of the total corporation tax payable by the company in the previous ten years or the payroll tax liabilities of the company for the period in which the R&D is incurred.

R&D expenditure may be carried back to the prior period to generate a cash refund where the company had a CT payment in the proceeding accounting period.

The credit is available for incremental expenditure incurred in any EU/EEA country, where the expenditure is not tax deductible in any other EU/EEA country.

With effect from 1 January 2015 the base year has been removed for determining qualifying expenditure. Prior to 2015 the reference year for determining the incremental expenditure for all years was 2003. The first €300,000 (€200,000 in 2013) of expenditure incurred did not refer to a base year; for expenditure in excess of €300,000, the base year reference was applicable. To establish the incremental spend by reference to the base year, trades of groups could be separated where they are carried on in separate geographic locations more than 20km apart. This allows a company to cease carrying out R&D activities, or dispose of an R&D facility in a particular location without impacting on the total R&D spend from other R&D centres in a group.

Expenditure on R&D carried out by a third level college on behalf of the company or group also qualifies if it does not exceed 5% of the company or group’s own R&D spend. Subcontracted costs to an unconnected third party, to a maximum of 15% (10% in 2013) of total qualifying expenditure, are also eligible for the tax credit. The third party contractor cannot also claim the R&D credit and the company must notify them in writing of this.

Grant aided expenditure on R&D only qualify for relief on a net of grant basis.

The R&D credit is also available for construction or refurbishment work carried out on a building used for qualifying R&D activities. The credit is equivalent to 25% of the qualifying cost of construction or refurbishment and may be claimed in full in the year in which the expenditure is incurred.

Key Employee R&D Credit

With effect from 1 January 2012 a credit may be awarded to a key employee by means of a tax credit.

A key employee is described as an employee who has the following characteristics:

The employee must;

  • Not be, or have been, a director of the company and must not be connected to a director of the Company.
  • Not have, or have had a material interest (5%) in the company or be connected to a person who has a material interest in the Company.
  • Perform 50% of their activities in the conception or creation of new knowledge, products, processes, methods and systems.
  • Have 50% of the emoluments of the individual qualifying for R&D tax credit.

Other conditions:

  • The amount that can be surrendered to the employee is capped at the amount of corporation tax due from the Company before taking the R&D tax credit into account, i.e. the company must be paying tax in order to avail of the relief.
  • It is up to the Company to determine who receives the benefit of the reward and the amount of credit awarded.
  • The employee must make a claim to Revenue for a tax refund.
  • The individuals effective tax rate cannot be reduced below 23% (this includes jointly assessed spouses/civil partners). The credit does not apply to the USC. Unused credits may be carried forward indefinitely or until the employee leaves the Company.
  • Revenue retains the right to clawback the credit if the R&D claim is denied on an audit. Revenue will seek to levy the clawback on the Company in priority to the employee.
  • Where a company has made incorrect claim for R&D credit and has surrendered it to a key employee, the tax foregone can be recovered from the employer as opposed to the individual.

 

New Company Start ups

An exemption from corporation Tax for the first three years of trading applies to certain new start up companies.

Where a company is incorporated after 14 October 2008 and commences to trade in 2016, 2017 or 2018, it is exempt from CT and CGT on the disposal of assets used for the purposes of the new trade.

The exemption is subject to a liability threshold, and no relief will be available where profits exceed €480,000.

Corporation tax Liability for the period Availability of Relief
< €40,000 Full exemption
€40,000 to €60,000 Marginal relief
> €60,000 Fully taxable

The relief is restricted to new trades and does not apply where the trade was previously carried on by another person, or where the trade, or part of the trade was carried on by an associated company.

The relief is limited to the amount of employer PRSI that is paid, or that amount that would have been payable if relief under the Employer Job Incentive Scheme did not apply. There is a cap applied to the amount of employer PRSI per person which is capped at €5,000 per person, with an overall limit of €40,000.

The relief does not apply to companies carrying on professional services, nor does it apply to companies which carry on a trade of :

  • land dealing,
  • petroleum and mineral activities,
  • aquaculture or agriculture,
  • coal,
  • road freight operations,
  • export related activities,
  • undertakings in difficulty

In addition, in order to comply with EU requirements it should be noted that Revenue may disclose details of relief granted under the scheme.

The new corporation tax relief has been introduced with effect from 1 January 2016.

The KDB provides that profits from patented inventions and copyrighted software (qualifying assets) earned by an Irish company can, to the extent it relates to R&D undertaken by that company, be effectively taxed at a rate of 6.25%.

The relief is available to companies for accounting periods beginning on or after 1 January 2016 and before 31 December 2020.

The amount of the profits arising from the qualifying assets that can avail of the relief will be determined by the proportion that the Irish company’s R&D costs (qualifying expenditure) bear to the total R&D costs (overall expenditure) incurred on the qualifying assets. The overall expenditure could also include expenditure on R&D performed by other group companies (related parties) or amounts paid to acquire intellectual property.

The qualifying expenditure includes the cost of R&D that is outsourced to unrelated parties but excludes expenditure on R&D performed by related parties and the cost of acquired intellectual property. To take account of this excluded
expenditure, an additional “uplift” provides that qualifying expenditure may be increased by the lower of either 30 per cent of qualifying expenditure, or the aggregate of amounts paid to related parties and to acquire intellectual property.

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Payment and Compliance

Large Companies

A large company is one with CT liability of €200,000 or more in the preceding year and it must pay its CT liability as follows:

6 months before the end of the accounting period (day 21 of the 6th month)

  • 50% of the previous years final liability
  • 45% of the current years final liability

One month before the end of the Accounting period (day 21 of the 11th month)

  • 90% of the final liability (after taking into account the payment five months earlier)

Filing Date (21st day of the 9th moth following the accounting period end)

  • Balance of any tax due

A company’s preliminary tax liability includes the corporation tax, close company surcharge and income tax liabilities for the accounting period, it also includes tax on chargeable gains, except for those arising from disposals of development land. To ensure interest charges will be avoided, the preliminary tax payment (the aggregate of the first and second installment) must represent at least 90% of the final tax liability for the accounting period.

Special arrangements exist to take account of chargeable gains arising in the last month of an accounting period and for accounting periods of one month’s duration.

Small Companies

A small company i.e. where last years Corporation tax liability was less than €200,000, may base its first instalment on 100% of the previous years’ liability.

New Companies

Where a company is a new company with a corporation tax liability of less than €200,000 for the first accounting period, it will not be required to pay preliminary tax for that period. A new company may pay tax for the first year when filing it’s tax return.

Group Companies

Where companies are large companies and members of the same Group, where one company has satisfied it’s preliminary tax obligations and paid in excess of 90% of the final corporation tax liability, and another company has not paid sufficient preliminary tax, then the excess paid by one company may be transferred to the other company to limit any exposure to interest.

Filing

The corporation tax return (Form CT1) must be filed within eight months and 21 days of the accounting period end, otherwise a surcharge will arise (23rd day where filed online).

Information included in CT1

A company is required to disclose information in relation to certain incentives/relief’s on their annual tax return, the relief’s to be detailed will be highlighted on the return forms.

Failure to provide the relevant information may result in a penalty of €950, as well as a surcharge of 5% of the tax due subject to a maximum of €12,695.

Country by Country Reporting

A new law requires an Irish resident parent company of large Multinational (MNE) groups to provide annually, and for each tax jurisdiction in which they do business, a country-by-country report to the Revenue Commissioners.

Exemption for Disposal of Shareholdings

An exemption for Irish based companies from Capital Gains Tax on the disposal of shares in a subsidiary company. To qualify for the exemption, a 5% holding of ordinary shares must be held within a two year period of disposing of the shares. The shares must be held for a period of at least twelve months and must be held in a company located in an EU or treaty country.

The company being disposed of must be a trading company, or the holding company of a trading group (i.e. the holding company together with all other companies in which it has a 10% interest must consist wholly or mainly of trading activities).

Payment Dates for Capital Gains Tax

Payment of capital gains tax relating to a disposal of development land are treated in the same way as a disposal for an individual.

For disposals of assets other than development land, the payment and filing dates are as outlined above.

Special rules apply where a gain is made in the last month of the accounting period, this allows for top up payments to be made without an exposure to interest.

Penalties

The surcharge for late filing and the restrictions on claims for certain losses and relief’s are as follows:

Date of Filing Surcharge Restriction
Return filed within 2 months
of expiry of deadline
5% of tax payable
maximum €12,695
25% of loss or relief
maximum €31,740
Return filed 2 months or more
after expiry of deadline
10% of tax payable
maximum €63,485
50% of loss or relief
maximum €158,715

Payment and filing deadlines may be extended to the 23rd of the month where the return is filed electronically via ROS the Revenue online system.

Mandatory Reporting

Certain transactions which have the main benefit of obtaining a tax advantage are reportable to Revenue.

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